GHO stablecoin is a decentralized, over-collateralized stablecoin pegged to the U.S dollar. The crypto asset was proposed by Aave Companies (the body behind the Aave protocol) earlier this year and was recently greenlit by Aave DAO.
Unlike most stablecoins, GHO will be backed by user-selected cryptocurrencies, targeted at yield earning and owned by community members rather than a single entity.
However, it bears the nature of an algorithm stablecoin, which mints precisely $1 worth of tokens when users provide a $1 value of cryptocurrency.
Aave’s founder, Stani Kulechov, expressed his team’s vision for the USD- pegged asset.
“While the assets would secure GHO on the Ethereum market, the main vision for GHO is to pursue organic adoption via L2s to solve real-life payment opportunities across the internet and on-ground,” he shared via a Twitter post.
What is Aave Protocol?
Aave is an open-source protocol running on the Ethereum blockchain. The protocol was designed to create non-custodial liquidity markets that allow users to earn interest and lend and borrow crypto assets.
Launched in 2017 by Stani Kulechov and his team, Aave was first known as ETHLend. It was later rebranded to its present name in 2018. The protocol has since become one of the leading cryptocurrency lenders in the industry.
Acting as a decentralized market, Aave uses smart contracts to enable asset management, eliminating the need for centralized intermediaries and financial institutions.
Borrowing and Lending on Aave
At its core, Aave software supports the development of lending pools where users can lend or borrow over 30 cryptocurrencies. Users who contribute (lend) to the liquidity pool earn interest, while those who borrow get interested.
To borrow funds, Aave users must deposit other cryptocurrencies they own as collateral.
However, the maximum amount that can be borrowed depends on how much the user deposits. If the investor cannot pay back at the required date, the smart contract is already coded to liquidate the investor’s assets.
Another reason Aave is famous is its flagship offering- flash loans- the first uncollateralized loan option in the DeFi space. However, the loan is only available if it can be repaid in the same transaction.
The GHO Stablecoin
Much like Aave’s lending and borrowing system, the plan is to allow users to mint GHO tokens against their supplied collaterals.
For a user to mint GHO, they must supply collateral. Accordingly, when the user borrows, they earn interest. Once the borrowed funds are recovered, or the investor is liquidated, the GHO protocol burns their GHO tokens.
The interest collected on their borrowed position will be directly transferred to AaveDAO; instead of the standard reserve factor ordered when users borrow other assets. The interest rates on borrowing will be determined by the AaveDAO, using stable rates that depend on market conditions.
AaveDAO intends to use the revenue to bolster its treasury, finance innovations, support contributors in the ecosystem, and serve as a hedge fund during market downturns or to execute other DAO projects.
Aave also introduces the concept of facilitators through GHO. Facilitators (protocol, entity, etc.) are taxed to generate and burn GHO tokens.
To ensure operations’ trustless running, Aave Governance must approve these facilitators.
GHO As An Investment
Although the price of GHO is expected to be constant since stable assets back it, the Aave protocol fully intends to make the stablecoin an investment opportunity for users.
In addition to lending interest, Aave will give users who have staked AAVE tokens (stkAAVE holders) access to mint the token at a discounted rate.
Most importantly- and the basis of GHO creation- all decisions relating to GHO, including monetary policies, will be in the hands of Aave governance. This will cement the stablecoin’s image as a decentralized, community-owned currency.
The vision for GHO is adoption within and outside the crypto community- for crypto enthusiasts and mainstream users.
According to a post on the above governance website, GHO’s introduction to the market is in hopes that it will;
“…provide a level of security and decentralization that is inclusive for crypto-native users while also using a growth strategy that emphasizes its use cases for a growing mainstream audience.”
Aave has also released the result of its first security audit for GHO, conducted by Open Zeppelin, a top security firm.